What are analysts trying to evaluate when analyzing a cash flow adequacy ratio?
ID: 2564689 • Letter: W
Question
What are analysts trying to evaluate when analyzing a cash flow adequacy ratio?
Cash flow adequacy ratios are used to evaluate how well a company can cover payments to suppliers and other operating activities of the firm.
Cash flow adequacy ratios are used to evaluate how well a company can cover annual payments of items such as debt, capital expenditures, and dividends from operating cash flow.
Cash flow adequacy ratios are used to evaluate how well a company can generate profits to cover all operating, investing and financing activities.
Cash flow adequacy ratios are used to evaluate how well a company can cover interest expense, lease payments and other fixed charges with cash from operations.
Cash flow adequacy ratios are used to evaluate how well a company can cover payments to suppliers and other operating activities of the firm.
Cash flow adequacy ratios are used to evaluate how well a company can cover annual payments of items such as debt, capital expenditures, and dividends from operating cash flow.
Cash flow adequacy ratios are used to evaluate how well a company can generate profits to cover all operating, investing and financing activities.
Cash flow adequacy ratios are used to evaluate how well a company can cover interest expense, lease payments and other fixed charges with cash from operations.
Explanation / Answer
Cash flow adequacy ratios are used to evaluate how well a company can cover annual payments of items such as debt, capital expenditures, and dividends from operating cash flow.
Cash flow adequacy ratio = Cash flow from operations ÷ (Long term debt + Fixed assets purchased + Cash dividends paid)
A ratio of 1 or more means, the company operation has generated enough cash to cover it's necessary business obligation. A ratio of less than 1 represents liquidity problems of the business.
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